Struggling households have been hit by price rises not seen in 40 years years, it emerged today, after the consumer prices index surged by 9.1pc in the 12 months to May.
To combat soaring inflation, the central bank raised interest rates from 1.pc to 1.25pc earlier this month. However, this will likely not be enough to bring down prices and a series of further increases are widely anticipated this year.
Here, Telegraph Money answers all of your questions.
1. Change where you invest
Bond owners could suffer the most. Investors sell bonds – which pay a fixed return, or “coupon” – when inflation rises as it eats into the real value of that income. Higher inflation also increases the likelihood the Bank of England raises interest rates, as it has done, which would be bad news for bonds as it decreases the relative value of their payments versus newly-issued debt.
Investors should protect themselves by buying index-linked bonds, where interest paid rises in line with inflation.
Inflation, in moderation, is not necessarily bad for stocks, as some companies can pass costs onto consumers to balance out rising input costs. Those which have strong pricing power, such as utilities or large consumer brands, should be able to carry on with business as normal.
Oil and mining companies will also do well as rising commodity prices are good for their bottom lines. Utility groups often pay dividends linked to inflation.
However, inflation could be bad for retailers, such as supermarkets, which may lack the ability to increase prices.
Infrastructure and real estate investment trusts often have contracts linked to inflation, so their income and dividends would rise as inflation does. Gold could also rise in value. Supply is relatively fixed, so more money floating around the economy should increase what people are willing to pay.